CZR
I believe CZR, currently near multi-year lows (~$36), is an attractive investment with the potential to generate nearly its market cap in FCF by 2027.
Brick & Mortar: Undervalued
CZR is the largest gaming operator in the US, with 52 properties across 18 states.
The brick & mortar segment alone (Vegas, Regionals) should generate $4.1bn EBITDAR / $1.3bn FCF in 2025.
Digital: Market Overlooking Profitability Inflection
CZR has concluded a multi-year investment phase where Digital incurred losses to acquire customers.
Online Sportsbetting and iGaming have 50%+ incremental margins in an industry growing at over 30%.
The end of costly brand partnerships will add over $150mm of EBITDA.
If the Digital segment reaches the $500mm EBITDA target in the next two years, it could equal the market cap.
Catalysts: Numerous Near-term Catalysts to Re-rate the Equity
2H’24 FCF inflection: Capex reduction and property ramps in New Orleans and Virginia.
Non-core disposals: Monetizing land, brands, and non-core leases to speed up deleveraging.
Buybacks: Anticipate authorization with the capex reduction (~4Q’24).
VICI: Possible exercise of Centaur option at 13.0x in 2H’24, providing CZR with ~$2.3bn cash.
Macro: Consensus shifting back to “higher for longer” = potential rate cuts and CZR gains.
With a 90 – 170% NTM upside based on FCF inflection, Digital execution, and capital allocation shifts to buybacks, I believe CZR offers the best risk/reward in US gaming for a liquid security (~$140mm ADV).
The Math
CZR is trading at 4.0x P/FCF on ’27 projections and will generate about 85% of its market cap in cumulative FCF from 2024 to 2027. Key drivers include 1) digital inflection, 2) regional property openings, 3) capex reduction, and 4) buybacks. My base case is more conservative than management’s target of 3-year forward FCF per share of $12.50 (based on ~$5.0bn of EBITDAR) as outlined in the 1Q’23 earnings call.
Business Overview
CZR owns or manages 52 properties across the US. The Las Vegas segment includes 9 strip properties, such as the iconic Caesars Palace, and the Regional portfolio spans 18 states. CZR’s digital segment is a top-4 player in online sports betting and iGaming, with an estimated 6% market share.
Segment EBITDAR breakdowns are projected as follows for 2024 (pre-corporate):
Las Vegas - $2,016mm (47%)
Regional - $1,962mm (46%)
Caesars Digital - $250mm (6%)
Managed - $78mm (2%)
CZR was formed by the merger of legacy Caesars and Eldorado Resorts in July 2020, with Eldorado management taking the lead, including CEO Tom Reeg. Notably, the digital segment has incurred over $1.1bn in cumulative EBITDA losses over the past three years to expand into new states and acquire customers. This segment is now EBITDA positive and growing rapidly.
Why does the opportunity exist?
Leverage
The market is preoccupied with interest rates and leverage, scrutinizing Fed comments, CPI, and PMI data. Recent data suggests a “higher for longer” outlook, causing significant volatility. CZR’s leverage is >5x EBITDAR (including leases), but there are no issues with maturities, covenants, coverage, or liquidity. When the market anticipates rate cuts, CZR will likely benefit.
Consumer Trends
There are signs of consumer fatigue with exhausted Covid stimulus savings. However, structural changes in Las Vegas, including recent Strip closures and attractions like the Raiders, Knights, and Sphere, soften the recessionary impact.
Digital Segment
The top digital business (FanDuel, ~40% share) is owned by FLUT, and the second player (DKNG, ~35% share) is the only publicly traded pure play. CZR, the fourth player, has shifted to profitability, which may initially impair subscriber growth but should lead to EBITDA growth by eliminating wasteful deals.
Bad Q1 2024
Revenue, EBITDAR, and EPS missed estimates due to extraordinarily bad hold in Vegas and Digital, Adele concert cancellations, and bad weather. These issues were one-offs and should not recur regularly.
Catalyst Path
A visualized catalyst path will be followed up with supporting details for each:
VICI put/call
For Harrah’s Hoosier Park and Horseshoe Indianapolis (“Centaur” assets), VICI has the option to call the properties at a 13.0x multiple (7.7% cap) of the initial annual rent in a sale-leaseback transaction, while CZR can put the properties to VICI at 12.5x (8.0% cap). VICI has started engaging Indiana state regulators and refreshed their ATM to a $2.0bn program. This groundwork suggests a potential call in the coming months.
CZR views the lease as expensive financing, but the deal is seen as a positive catalyst due to the multiple discrepancy – 13.0x transaction multiple versus CZR stock trading at 7.2x ’25 EV/EBITDAR. The proceeds (~$2.3bn) will likely be split between debt paydown and buybacks, positively affecting CZR’s stock.
Capital Structure
High leverage is a risk, but recent refinancings have pushed most maturities to 2028-2032, with the nearest being $1.6bn maturing in 2027. Total liquidity is $2.8bn, with $726mm of B/S cash and $2.1bn of revolver availability. A significant spread between forward FCF yield to equity and 2029 bond yields indicates a positive outlook. The $6.1bn of floating rate debt will benefit if rates fall, saving $61mm of cash interest for every 100bps decline in SOFR.
Digital Segment
CZR’s digital segment is expected to be a major value driver. Management targets $500mm ’25 EBITDA, supported by industry growth and incremental margins. My base case assumes $400mm EBITDA for conservatism. The market currently ascribes little value to the digital segment, so any growth from the current run-rate should add value.
Comps Analysis
Gaming is undervalued overall, but CZR stands out due to its high FCF yield and asset quality. CZR has a unique mix of significant exposure to LV, owned RE for half of the portfolio, and a digital segment moving towards profitability. Despite these strengths, it trades at 7.3x EV/EBITDAR on ’25.
Non-core Assets
CZR’s non-core assets have substantial value ignored by most models. Management has hinted at potential disposals this year, which could include non-casino assets, brands, and land, accelerating de-leveraging.
SOTP Analysis
Our SOTP case analysis suggests the stock could double in the base case and reach ~$100 in the bull case. While the downside scenario is possible, we believe the company will avoid permanent capital impairment despite elevated leverage. The business should survive, even with potential mark-to-market fluctuations.
Real Estate Value & Lease Accounting
Owned-RE value provides downside protection. Las Vegas PropCo transaction multiples are in the high teens, and CZR owns 6 strip assets. The regional RE value is also substantial. A consistent approach would lower the grossed-up lease obligation or give regionals a higher multiple. We did not factor this in our base case, as we believe the stock can double or triple without this adjustment.
Risk & Mitigants
Risk (1): Macro risks are present, but structural changes in Las Vegas and new regional openings provide mitigation. Management estimates ~$400mm of EBITDA at risk in a GFC-type scenario but has counterbalances.
Risk (2): CZR’s balance sheet has low-cost, long-term debt and $2.8bn of liquidity. The deleveraging path is rapid as FCF increases and non-core assets are sold.
Risk (3): The $500mm Digital ’25 EBITDA target is realistic, with management providing a credible bridge based on industry growth and margin improvements. My conservative estimate is $400mm.
Risk (4): If VICI does not exercise the call option on Centaur properties, CZR management has stated they will not exercise the put. My projections do not assume a VICI call.
Risk (5): Volatility in quarterly earnings is mitigated by one-off factors like low Vegas hold and poor weather, which are unlikely to recur consistently.
Risk (6): CZR is a popular funding short for those long on consensus, pure-play digital names. This dynamic should unwind as CZR executes its strategy.